<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ .
Commission file number 0-22595
FRIEDE GOLDMAN INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-1362492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
525 E. CAPITOL STREET, SUITE 402
JACKSON, MISSISSIPPI 39201
(Address of principal
executive offices
and zip code)
(601) 352-1107
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of shares of the Registrant's common stock, par value $.01 per share
outstanding at November 12, 1997 was 24,405,046 shares.
<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC.
TABLE OF CONTENTS
PAGES
-----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements 1
Consolidated Balance Sheets as of December 31, 1996 and
September 30, 1997 1
Consolidated Statements of Operations for the three months and
nine months ended September 30, 1996 and September 30, 1997 2
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and September 30, 1997 3
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Forward Looking Statements 13
PART II--OTHER INFORMATION 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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FRIEDE GOLDMAN INTERNATIONAL INC.
---------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ --------------
(Unaudited)
-------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 1,509,876 $43,317,335
Restricted certificates of deposit 4,651,964 -
Marketable securities, at fair market value 6,618,766 -
Accounts receivable 4,869,576 17,569,115
Inventory and stockpiled materials 577,904 1,950,904
Investment in sales-type lease, current portion 457,710 179,069
Costs and estimated earnings in excess of billings on uncompleted contracts 284,052 516,793
Prepaid expenses 644,482 2,599,228
----------- -----------
Total current assets 19,614,330 66,132,444
Property, plant and equipment, net of accumulated depreciation 5,546,399 15,909,297
Investment in sales-type lease, less current portion 1,171,205 1,032,045
Intangibles and other assets 1,250,121 1,271,019
----------- -----------
Total assets $27,582,055 $84,344,805
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Short-term debt, including current portion of long-term debt $10,235,349 $ 161,638
Advance from stockholder 1,400,000 -
Accounts payable, trade 3,075,216 9,472,862
Accrued expenses 537,786 3,177,820
Income taxes payable - 4,153,061
Billings in excess of costs and estimated earnings on uncompleted contracts 3,262,168 6,976,500
----------- -----------
Total current liabilities 18,510,519 23,941,881
Deferred income tax liability - 636,000
Long-term debt, less current maturities 2,852,649 1,049,476
----------- -----------
Total liabilities 21,363,168 25,627,357
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized,
no shares issued and outstanding - -
Common stock; par value $0.01; 25,000,000 shares authorized;
18,400,000 and 24,405,042 shares issued and outstanding at
December 31, 1996 and September 30, 1997 184,000 244,050
Additional paid-in capital 1,877,567 49,178,340
Retained earnings 2,548,649 9,295,058
Unrealized gain (loss) on marketable securities 1,608,671 -
----------- -----------
Total stockholders' equity 6,218,887 58,717,448
----------- -----------
Total liabilities and stockholders' equity $27,582,055 $84,344,805
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FRIEDE GOLDMAN INTERNATIONAL, INC.
----------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
1996 1997 1996 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenue $ 5,775,817 $34,628,577 $14,323,179 $80,151,773
Cost of revenue 3,992,131 23,217,829 10,236,732 52,641,716
----------- ----------- ----------- -----------
Gross profit 1,783,686 11,410,748 4,086,447 27,510,057
----------- ----------- ----------- -----------
Selling, general and administrative expenses 1,495,395 2,864,549 3,806,708 8,984,604
----------- ----------- ----------- -----------
Operating income (loss) 288,291 8,546,199 279,739 18,525,453
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (225,210) (125,648) (662,702) (495,782)
Interest income 103,211 490,930 324,635 576,049
Gain (loss) on sale or distribution of
Assets 30,700 - 483,988 3,921,973
Litigation settlement - - 3,466,635 611,310
Other 52,242 33,847 69,321 86,135
----------- ----------- ----------- -----------
Total other income (expense) (39,057) 399,129 3,681,877 4,699,685
----------- ----------- ----------- -----------
Income before tax 249,234 8,945,328 3,961,616 23,225,138
Income tax expense - 3,470,061 - 4,720,061
----------- ----------- ----------- -----------
Net income 249,234 5,475,267 3,961,616 18,505,077
Pro forma income tax provision 96,000 - 1,470,000 3,980,000
----------- ----------- ----------- -----------
Pro forma net income $ 153,234 $ 5,475,267 $ 2,491,616 $14,525,077
=========== =========== =========== ===========
Earnings per share $0.01 $0.23 $0.22 $0.92
=========== =========== =========== ===========
Pro forma earnings per share $0.01 $0.23 $0.14 $0.72
=========== =========== =========== ===========
Weighted average shares:
Primary 18,400,000 23,515,569 18,400,000 20,123,928
=========== =========== =========== ===========
Fully diluted 18,400,000 23,589,682 18,400,000 20,148,904
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FRIEDE GOLDMAN INTERNATIONAL INC.
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1996 1997
------------ -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,961,616 $ 18,505,077
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 500,000 978,423
Compensation expense related to stock issued
to employees - 594,104
Gain on sale of assets (483,988) (3,921,973)
Unrealized loss on marketable securities 368,498 -
Deferred income tax provision - 636,000
Net increase in billings related to costs and
estimated earnings on uncompleted contracts 3,016,248 3,481,591
Net effect of changes in assets and liabilities:
Restricted certificates of deposit (137,137) 4,651,964
Accounts receivable (5,020,294) (12,699,539)
Inventory and stockpiled materials (147,520) (1,373,000)
Prepaid expenses and other assets 80,892 (2,076,147)
Accounts payable and accrued expenses 2,232,655 13,190,741
----------- ------------
Net cash provided by operating activities 4,370,970 21,967,241
----------- ------------
Cash flows from investing activities:
Capital expenditures for plant and equipment (1,204,415) (12,136,365)
Proceeds from sale of property, plant and
equipment 88,521 395,521
Payments received on sales-type lease 309,400 417,801
Investment in marketable securities (2,620,029) -
----------- ------------
Net cash used in investing activities (3,426,523) (11,323,043)
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
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FRIEDE GOLDMAN INTERNATIONAL INC.
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
-------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1996 1997
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from financing activities:
Proceeds from common stock offering $ - $46,766,719
Net borrowings (repayments) under lines of credit 901,156 (1,501,000)
Proceeds from borrowings under debt facilities 588,978 468,203
Repayments on borrowings under debt facilities (411,675) (7,897,979)
Distributions to stockholders (2,817,836) (6,672,682)
----------- -----------
Net cash provided by (used in) financing activities (1,739,377) 31,163,261
----------- -----------
Net increase (decrease) in cash and cash equivalents (794,930) 41,807,459
Cash and cash equivalents at beginning of year 1,207,206 1,509,876
----------- -----------
Cash and cash equivalents at end of period $ 412,276 $43,317,335
=========== ===========
Supplemental disclosure of cash flow information -
Cash paid during the period for interest $ 663,000 $ 521,000
=========== ===========
Issuance of common stock or options or options as compensation $ - $ 594,000
=========== ===========
Non-cash distributions of property to stockholders $ - $ 1,641,000
=========== ===========
Assumption of note payable by stockholder $ - $ 198,000
=========== ===========
Distribution of marketable securities to stockholder
to satisfy note payable $ - $ 1,400,000
=========== ===========
Distribution of marketable securities to stockholders $ - $ 6,391,000
=========== ===========
Assumption of margin account debt by stockholders $ - $ 2,749,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
FRIEDE GOLDMAN INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, INITIAL PUBLIC OFFERING AND STOCK SPLIT
The consolidated financial statements include the accounts of Friede
Goldman International Inc. and its wholly-owned subsidiaries, HAM Marine, Inc.
("HAM") and Friede & Goldman, Ltd. ("Friede & Goldman") (collectively referred
to as the "Company"). The Company was incorporated in February 1997 under the
laws of the state of Delaware. The Company's operations are performed
substantially through its wholly-owned subsidiaries. HAM's primary business is
to provide conversion, retrofit and repair services for offshore drilling rigs.
At September 30, 1997, substantially all of HAM's services were conducted at a
deepwater dock facility on land leased from the Port Authority in Pascagoula,
Mississippi. Friede & Goldman's primary business is the design of offshore
drilling and production units, including jackups, semisubmersibles, drillships
and floating production, storage and offloading vessels, for new construction
and with respect to upgrade and modification projects. Friede & Goldman's
offices are located in New Orleans, Louisiana.
In July 1997, the Company completed an initial public offering (the
"Offering") of its common stock. Immediately prior to the consummation of the
Offering, the stockholders of HAM and Friede & Goldman contributed all of their
ownership in HAM and Friede & Goldman to the Company in exchange for shares of
common stock in the company (the "Reorganization"). During May 1997, in
anticipation of the Reorganization and the offering, the Company authorized an
increase in the amount of authorized shares to 5,000,000 shares of $0.01 par
value preferred stock and 25,000,000 share of $0.01 par value common stock. The
Reorganization resulted in the issuance of 9,200,000 (18,400,000 after the 2 for
1 stock split discussed below) shares of the Company's common stock to the
stockholders of HAM and Friede & Goldman. The number of shares of common stock
of the Company received by each of the stockholders of HAM and Friede & Goldman
in the Reorganization was in proportion to each stockholder's previous ownership
percentage in both HAM and Friede & Goldman. The issuance of shares pursuant to
the Reorganization has been reflected retroactively in the accompanying
financial statements and per share calculations.
In connection with the Offering, the Company sold 3,002,521 (6,005,042
after the 2 for 1 stock split discussed below) shares of its common stock for
net proceeds of approximately $46.8 million. The Company currently intends to
utilize the net proceeds of the Offering to fund a portion of its anticipated
capital requirements over the next 12 to 18 months. Pending the Company's use
of the net proceeds of the Offering, the Company repaid borrowings under its
existing revolving credit facility and invested the remaining net proceeds from
the Offering in short-term, investment-grade, interest-bearing instruments.
In September 1997, the Company declared a 2 for 1 stock split,
effective October 16, 1997 for stockholders of record as of October 1, 1997.
Unless otherwise indicated, all share and per share data have been restated to
reflect the effects of the 2 for 1 split.
2. QUARTERLY FINANCIAL INFORMATION
The information presented as of September 30, 1997 and for the three-
month and nine-month periods ended September 30, 1996 and 1997 is unaudited. In
the opinion of the Company's management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring adjustments)
which the Company considers necessary for the fair presentation of the Company's
financial position as of September 30, 1997 and the results of its operations
and its cash flows for the three-month and nine-month periods ending September
30, 1996 and 1997.
In the opinion of management, the financial statements included herein
have been prepared in accordance with generally accepted accounting principles
and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
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<PAGE>
Accordingly, certain information and disclosures normally included in financial
statements have been condensed or omitted.
The results of operations for the three-month and nine-month periods
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1997.
3. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company records revenue on contracts on the percentage-of-
completion method. Contract revenue is earned based upon the percentage that
incurred costs to date, excluding the costs of any purchased but uninstalled
materials, bear to total estimated costs, commencing when progress reaches a
point where experience is sufficient to estimate final results with reasonable
accuracy. As contracts extend over one or more years, revisions in costs and
earnings estimates during the course of the work are reflected in the accounting
period in which the facts which require the revisions become known. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Other changes, including those arising from
contract penalty provisions, and final contract settlements are recognized in
the period in which the revisions are determined. Use of the percentage-of-
completion method requires the use of estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the balance sheets
and the reported amounts of revenues and expenses for the periods presented.
Actual results could differ materially from those estimates.
Income Taxes
Prior to June 15, 1997, the HAM and Friede & Goldman were S
Corporations for Federal and state income tax purposes, and as a result, were
not subject to income taxes. On June 15, 1997, such S Corporation status was
terminated. As a result of termination of S Corporation status, the Company
recorded a net deferred income tax liability through a charge to earnings of
$800,000 in the second quarter of 1997, attributable primarily to the difference
in financial reporting and tax reporting methods of accounting for depreciation
and sales-type lease. In addition, the Company recognized income tax expense of
$3.9 million for the period from June 16, 1997 through September 30, 1997, the
period for which the Company was a C Corporation.
The pro forma income tax provision is the result of the application of
a combined Federal and state rate (37%) to income before income taxes for
periods prior to termination of S Corporation status.
Earnings Per Share
Earnings per share consists of the Company's historical net income
divided by the weighted average shares of common stock outstanding after giving
retroactive effect to the Reorganization and the 2 for 1 stock split described
in Note 1 above and the dilutive effect of stock options determined using the
treasury stock method.
Pro Forma earnings per share represents pro forma net income, after
giving effect to the pro forma provision for income taxes, divided by the
weighted average shares of common stock outstanding after giving retroactive
effect to the Reorganization and the 2 for 1 stock split described in Note 1
above and the dilutive effect of stock options determined using the treasury
stock method.
4. DISTRIBUTION TO STOCKHOLDERS
In connection with termination of its S Corporation status and the
Offering, the Company made distributions of $11.8 million to its shareholders of
record at June 15, 1997. A portion of such distributions were made in the form
of property and marketable securities, net of related debt. As of September 30,
1997, the entire $11.8 million had been distributed.
During the nine-month period ended September 30, 1997, the Company
realized gains of approximately $3.6 million as a result of distributions of
appreciated property and marketable securities.
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<PAGE>
5. LINE OF CREDIT
In March 1997, HAM Marine entered into a new credit facility (the
"Credit Facility") which provides for borrowings of up to $10.0 million, subject
to a borrowing base limitation equal to 80% of eligible receivables. The Credit
Facility is secured by contract-related receivables. In connection with
obtaining the Credit Facility, HAM Marine repaid all outstanding indebtedness
under the provisions of the existing credit facility and such facility was
terminated. At September 30, 1997, there was no outstanding balance under the
Credit Facility and the borrowing base amount was $10.0 million. Borrowings
under the Credit Facility bear interest equal to the lender's prime lending rate
plus 1/2% per annum. At September 30, 1997, the interest rate under the Credit
Facility was 9.0% per annum. The Credit Facility contains a number of
restrictions, including a provision which would prohibit the payment of
dividends by HAM Marine to the Company in the event that HAM Marine defaults
under the terms of such facility. In October 1997, the borrowing capacity under
the Credit Facility was increased to $20.0 million.
6. COMMITMENTS AND CONTINGENCIES
The Company recorded proceeds received from settlement of claims
against third parties of $3,466,635 during the first quarter of 1996 and
$611,310 during the second quarter of 1997.
In connection with the termination of certain contract labor
arrangements, the Company restructured its workmen's compensation insurance
arrangements and utilizes a different carrier from that formerly used by the
contract labor company. The insurer who provided workmen's compensation
coverage to the employment contractor has asserted that rates higher than those
charged during part of 1995, all of 1996 and through the date of termination of
the contract labor arrangement were more appropriate and has submitted billings
to the labor contractor totaling approximately $630,000. The labor contractor
believes the original rates charged by the insurer were appropriate and its
vigorously disputing the additional billings. No billings have been submitted
to the Company or claims asserted against the company by the labor contractor or
the insurer. However, it is reasonably possible that the insurer may assert a
claim against the Company. Management of the Company is unable to assess
whether such a claim will be asserted. Management of the Company believes that
the Company has no obligation to the insurer, and that the outcome of this
matter will not have a material impact on the Company's financial position or
results of operations.
The nature of the Company's activities relating to the conversion,
retrofit and repair of drilling rigs subjects its property and employees, along
with the property and employees of its customers and others to hazards which can
cause personal injury or damage or destruction of property. Although the
Company maintains such insurance protection as it considers economically
prudent, there can be no assurance that any such insurance will be sufficient or
effective under all circumstances or against all hazards to which the company
may be subject. In particular, due to the high cost of errors and omissions
policies related to the design of drilling rigs and production units, the
Company does not carry insurance covering claims for personal injury, loss of
life or property damage relating to such design activity. A successful claim
for which the Company is not fully insured could have a material adverse effect
on the Company.
The Company is involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.
RECENT EVENTS
In September 1997 the Company signed a Memorandum of Understanding
("MOU") with the Province of Newfoundland, Canada whereby the Company will
acquire substantially all of the operating assets of a shipyard and fabrication
facility in Marystown, Newfoundland (the "Marystown Facility"). The MOU
provides that the Company will acquire the operating assets as well as certain
current assets and liabilities for $1. However, the Company has agreed to
maintain certain minimum employment levels over a three year period or pay
penalties which could amount to $10,000,000 in the first year and $5,000,000 in
each of the second and third years subsequent to the transaction. The Company
also intends to invest up to approximately $10,000,000 in capital improvements
related to the Marystown Facility. The transaction is expected to close in the
fourth quarter of 1997.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company's results of operations are affected primarily by
conditions affecting offshore drilling contractors, including the level of
offshore drilling activity by oil and gas companies. The level of offshore
drilling activity is affected by a number of factors, including prevailing and
expected oil and natural gas prices, the cost of exploring for, producing and
delivering oil and gas, the sale and expiration dates of offshore leases in the
United States and overseas, the discovery rate of new oil and gas reserves in
offshore areas, local and international political and economic conditions and
the ability of oil and gas companies to access or generate capital sufficient to
fund capital expenditures for offshore, exploration, development and production
activities. Improving oil and gas price levels over the past five years have
led to increased drilling activity in the Gulf of Mexico. This increase in
drilling activity is also attributable to a number of recent industry trends,
including three-dimensional seismic mapping, directional drilling and other
advances in technology that have increased drilling success rates and efficiency
and have led to the discoveries of oil and gas in subsalt geological formations
(which generally are located in depths of 300 to 800 feet of water) and
deepwater areas of the Gulf of Mexico. In the deepwater areas where larger and
more technically advanced drilling rigs are needed, increased drilling activity
has increased demand for retrofitting offshore drilling rigs and improved
pricing levels for such services. In addition, increased drilling activity in
and around more mature fields in shallower waters has contributed to the
increase in demand for conversion, retrofit and repair services for jackups and
other offshore drilling rigs.
The Company believes that the current supply of offshore drilling rigs
worldwide is inadequate to satisfy increasing demand. From 1985 to 1996, there
was a decrease in the number of offshore drilling rigs worldwide from 809 to 639
rigs. The Company believes that, of the 366 jackups currently marketed
worldwide, only 47 are capable of drilling in water depths greater than 300 feet
and, of the 139 semisubmersibles currently marketed worldwide, only 25 are
capable of drilling in water depths greater than 3,000 feet. In addition,
substantially all of the current fleet of offshore drilling rigs were built more
than ten years ago, and many of these rigs need to be converted or modified in
order to continue to operate economically or to meet the requirements for
deepwater drilling
Due to increased demand for its services, the Company's backlog has
increased from $65.2 million at June 30, 1997 to [$132.0] million at September
30, 1997. To accommodate this increased demand, the Company has recently leased
additional acreage adjacent to its existing shipyard in Pascagoula, Mississippi
that provides it with additional dock space and covered fabrication capacity and
has increased its workforce from approximately 300 employees at December 1, 1996
to approximately 1,100 employees at September 30, 1997. In addition, the
Company has commenced construction of a state-of-the art shipyard that will be
capable of constructing new offshore drilling rigs and production units as well
as converting retrofitting and repairing existing offshore drilling rigs and
production units. Further, in September 1997 the Company signed a Memorandum of
Understanding ("MOU") with the Province of Newfoundland, Canada whereby the
Company will acquire substantially all of the operating assets of a shipyard and
fabrication facility in Marystown, Newfoundland (the "Marystown Facility"). It
is expected that the transaction will close in the fourth quarter of 1997. The
Marystown Facility is expected to be used to expand the Company's capacity for
new construction as well as retrofit and repair of offshore drilling rigs and
production units.
The addition of such facilities and capacity and the related increase
in workforce will cause a significant increase in the Company's costs due to
increased labor, lease rental and depreciation and amortization expenses.
Selling, general and administrative expenses and interest expense are also
expected to increase as a result of these business growth activities.
Management expects the increases in such costs will directly correlate to
anticipated increases in revenue from increased construction, conversion,
retrofit and repair activity. If such activity does not increase to the extent
management anticipates, the Company's gross profits, operating income and net
income could be adversely impacted by such increased costs.
For the last several years, substantially all of the Company's
Pascagoula, Mississippi work force was leased to the Company by employee leasing
companies serving the Company exclusively. All employee leasing arrangements
were terminated as of May 18, 1997, and the Company now directly employs its
employees at levels of wages and
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benefits substantially equivalent to those formerly provided by the employee
leasing companies. Management of the Company believes that the costs of
directly employing its laborers will be essentially the same as the historic
cost of the employee leasing arrangement most recently terminated. In
connection with the termination of employee leasing arrangements, the Company
restructured its workmen's compensation insurance arrangements and utilizes a
different carrier from that used by the employee leasing companies. Management
of the Company believes that the change in workmen's compensation insurance
arrangements and carriers will not result in costs which are significantly
different than those which would have been incurred under the previous
arrangements.
The Company generally performs conversion, retrofit and repair
services pursuant to contracts that provide for a portion of the work to be
performed on a fixed-price basis and a portion of the work to be performed on a
cost-plus basis. In addition, the scope of the services to be performed with
respect to a particular drilling rig often increases as the project progresses
due to additional retrofits or modifications requested by the customer or
additional repair work necessary to meet the safety or environmental standards
established by the Coast Guard or other regulatory authorities. With respect to
the fixed-price portions of a project, the Company receives the negotiated
contract price, subject to adjustment only for change orders placed by the
customer. As a result, under fixed price arrangements, the Company retains all
cost savings but is also responsible for all cost over-runs. Under cost-plus
arrangements, the Company receives specified amounts in excess of its direct
labor and materials cost so that it is protected against cost overruns but does
not benefit from cost savings. The cost and productivity of the Company's labor
force are primary factors affecting the Company's operating profits.
Accordingly, control by the Company of the cost and productivity of direct labor
hours worked on its projects is essential. The Company has developed a cost
reporting system that provides accurate cost information to the Company's
project managers on a daily basis. The Company believes that the access to
information provided in this system allows it to better manage its current
projects as well as to negotiate contracts on new projects on a profitable
basis.
The Company's operations are subject to variations from quarter to
quarter resulting from fluctuations in demand for the Company's services and,
due to the large amounts of revenue that are typically derived from a small
quantity of projects, the timing of the receipt of awards for new projects. In
addition, the Company schedules projects based on the timing of available
capacity to perform the services requested and, to the extent that there are
delays in the arrival of a drilling rig or production unit into the shipyard,
the Company generally is not able to utilize the excess capacity created by such
delays. Although the Company may be able to offset the effect of such delays
through adjustments to the size of its skilled labor force on a temporary basis,
such delays may adversely affect the Company's results of operations in any
period in which such delays occur.
The Company's revenue on contracts is earned, for the most part, on
the percentage-of-completion method which is based upon the percentage that
incurred costs to date bear to total estimated costs. Accordingly, contract
price and costs estimates are reviewed periodically as the work progresses, and
adjustments proportionate to the percentage of completion are reflected in the
accounting period in which the facts that require such adjustments become known.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Other changes, including those arising from
contract penalty provisions and final contract settlements, are recognized in
the period in which the revisions are determined. To the extent that these
adjustments result in a reduction or elimination of previously reported profits,
the Company would report such a change by recognizing a charge against current
earnings, which might be significant depending on the size of the project or the
adjustment. Cost of revenue includes costs associated with the fabrication
process and can be further broken down between direct costs (such as direct
labor hours and raw materials) allocated to specific projects and indirect costs
(such as supervisory labor, utilities, welding supplies and equipment costs)
that are associated with production but are not directly related to a specific
project.
Prior to June 15, 1997, each of HAM Marine, Inc. and Friede & Goldman,
Ltd. (the "Predecessors") operated as an S Corporation for federal and state
income tax purposes. As a result, each of the Predecessors has paid no federal
or state income tax, and their earnings have been subject to tax directly at the
stockholder level. On June 15, 1997, the stockholders of the Company and the
Predecessors terminated the S Corporation status of such entities. As a result,
the Company and each of the Predecessors became subject to corporate level
income taxation following such termination, and the Company recorded a net
deferred income tax liability through a charge to earnings of approximately $0.8
million in the second quarter of 1997 attributable primarily to the difference
in financial reporting and tax reporting methods of accounting for depreciation
and sales-type leases.
-9-
<PAGE>
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1996 and 1997
During the three months ended September 30, 1997, the Company
generated revenue of $34.6 million, an increase of 497%, compared to the $5.8
million generated in the three months ended September 30, 1996. This increase
reflects the substantial increase in demand for conversion and retrofit services
for the three months ended September 30, 1997, including a greater number of
relatively larger projects, as compared to the three months ended September 30,
1996.
Cost of revenue was $23.2 million for the three months ended September
30, 1997, compared to $4.0 million for the three months ended September 30,
1996, reflecting the significant increase in contract revenue. Gross profit for
the three months ended September 30, 1997 was $11.4 million as compared to $1.8
million for the three months ended September 30, 1996. As a percent of revenue,
gross profit for the three months ended September 30, 1997 increased as a result
of the nature of the projects being performed. Generally, larger scale
conversion and modification projects provide an opportunity for a higher gross
profit than do repair and inspection services.
Selling, general and administrative expenses ("SG&A expenses") were
$2.9 million for the three months ended September 30, 1997 compared to $1.5
million for the three months ended September 30, 1996. The increase in SG&A
expenses is primarily the result of the expansion of the Company's
administrative staff and facilities in relation to increased contract activity
and its status as a publicly owned company. The decline in SG&A expenses as a
percent of revenue for the three months ended September 30, 1997 as compared to
the three months ended September 30, 1996 is a result of the relatively low
level of contract activity in the three months ended September 30, 1996.
Operating income increased to $8.5 million for the three months ended
September 30, 1997, from $0.3 million for the three months ended September 30,
1996, reflecting primarily the significant increase in contract revenue and
related gross profit.
Net interest income was $0.4 million for the three months ended
September 30, 1997 compared to net interest expense of $0.1 for the three months
ended September 30, 1996. This change is attributable to the short-term
investment of the proceeds from the public offering of common stock in July
1997. The gain on the asset sales in the three months ended September 30, 1996
related primarily to the sale of marketable securities.
The provision for income taxes for the three months ended September
30, 1997 is the result of the application of a combined federal and state tax
rate (37%) to estimated taxable income for the periods subsequent to termination
of the Company's S Corporation status.
The pro forma provision for income taxes is the result of the
application of a combined federal and state tax rate (37%) to estimated taxable
income for periods prior to termination of the Company's S Corporation status.
Comparison of Nine Months Ended September 30, 1996 and 1997
During the nine months ended September 30, 1997, the Company generated
revenue of $80.2 million, an increase of 461%, compared to the $14.3 million
generated in the nine months ended September 30, 1996. This increase reflects
the substantial increase in demand for conversion and retrofit services for the
nine months ended September 30, 1997, including a greater number of relatively
larger projects, as compared to the nine months ended September 30, 1996.
Cost of revenue was $52.6 million for the nine months ended September
30, 1997, compared to $10.2 million for the nine months ended September 30,
1996, reflecting the significant increase in contract revenue. Gross profit for
the nine months ended September 30, 1997 was $27.5 million as compared to $4.1
million for the nine months ended September 30, 1996. As a percent of revenue,
gross profit for the nine months ended September 30, 1997 increased as a result
of the nature of the projects being performed. Generally, larger scale
conversion and modification projects provide an opportunity for a higher gross
profit than do repair and inspection services.
-10-
<PAGE>
Selling, general and administrative expenses ("SG&A expenses") were
$9.0 million for the nine months ended September 30, 1997 compared to $3.8
million for the nine months ended September 30, 1996. The increase in SG&A
expenses is primarily the result of the expansion of the Company's
administrative staff and facilities in relation to increased contract activity
and its status as a publicly owned company. The decline in SG&A expenses as a
percent of revenue for the nine months ended September 30, 1997 as compared to
the nine months ended September 30, 1996 is a result of the relatively low level
of contract activity in the nine months ended September 30, 1996.
Operating income increased to $18.5 million for the nine months ended
September 30, 1997, compared to $0.3 million for the nine months ended September
30, 1996, reflecting primarily the significant increase in contract revenue and
related gross profit.
Net interest income was $0.1 million for the nine months ended
September 30, 1997 compared to $0.3 million in net interest expense for the nine
months ended September 30, 1996, reflecting a lower level of average borrowings
by the Company and the short-term investment of proceeds from the July 1997
public offering of common stock.
In the nine months ended September 30, 1997, the Company realized
gains of approximately $3.6 million as a result of the distribution of certain
appreciated assets not used in the business to the stockholder of one of the
Predecessors. Also, gains of approximately $0.3 million resulted from the sale
of real estate held for investment. The gain on the asset sales in the nine
months ended September 30, 1996 related primarily to the sale of marketable
securities.
During the nine months ended September 30, 1996, the Company received
approximately $3.5 million in proceeds from the settlement of a lawsuit filed in
1992 related to a contract. Settlement proceeds of approximately $0.6 million
were received in the nine months ended September 30, 1997 related to another
contract.
Income tax expense for the nine months ended September 30, 1997
consists of approximately $0.8 million attributable to the initial recording of
a net deferred tax liability upon termination of the Predecessors' S Corporation
status and $3.9 million attributable to earnings of the Company subsequent to
the termination of such status.
The pro forma provision for income taxes is the result of the
application of a combined federal and state tax rate (37%) to estimated taxable
income for periods prior to termination of the Company's S Corporation status.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its business activities through
funds generated from operations, a credit facility secured by accounts
receivable, and long-term borrowings secured by assets purchased with proceeds
from such borrowings. Net cash provided by operations was $4.4 million and
$22.0 million for the nine months ended September 30, 1996 and 1997,
respectively. Net borrowings from all credit arrangements were $1.1 million for
the nine months ended September 30, 1996. For the nine months ended September
30, 1997, the Company made net repayments on all credit arrangements of $8.9
million.
The Company's capital requirements historically have been primarily
for improvements to its facilities and related equipment. During the nine
months ended September 30, 1997, capital expenditures were approximately $12.1
million, including approximately $5.4 million for the construction of the new
Pascagoula, Mississippi shipyard, $1.7 million for construction of other
buildings and improvements, $4.0 million for purchase of equipment, $0.3 million
for construction and improvement of additional dockspace and $0.7 million for
the purchase of office furniture and equipment.
In March 1997, HAM Marine entered into a new credit facility (the
"Credit Facility") which provides for borrowings of up to $10.0 million, subject
to a borrowing base limitation equal to 80% of eligible receivables. The Credit
Facility is secured by contract-related receivables. In connection with
obtaining the Credit Facility, HAM Marine repaid all outstanding indebtedness
under the provisions of the existing credit facility and such facility was
terminated. At September 30, 1997, there was no outstanding balance under the
Credit Facility and the borrowing base amount was $10.0 million. Borrowings
under the Credit Facility bear interest equal to the lender's prime lending rate
plus 1/2% per annum. At September 30, 1997, the interest rate under the Credit
Facility was 9.0% per annum. The Credit Facility
-11-
<PAGE>
contains a number of restrictions, including a provision which would prohibit
the payment of dividends by HAM Marine to the Company in the event that HAM
Marine defaults under the terms of such facility. In October 1997, the borrowing
capacity under the Credit Facility was increased to $20.0 million.
In July 1997, the Company completed an initial public offering (the
"Offering") of 3,002,521 (6,005,042 after the 2 for 1 stock split) shares of its
common stock for net proceeds of approximately $46.8 million. The Company
currently intends to utilize the net proceeds of the Offering to fund a portion
of its anticipated capital requirements over the next 12 to 18 months of between
$50 million and $65 million, including (i) approximately $29 million to
construct and equip its new shipyard, (ii) approximately $3 million for capital
expenditures to increase the productive capacity and efficiency of its existing
shipyard, (iii) approximately $3 million for research and development
expenditures related to the design of new, technologically innovative offshore
drilling rigs and floating production units, (iv) between $10 million and $20
million of additional working capital related to increased levels of conversion,
retrofit and repair activities and new construction of offshore drilling figs
and floating production units and (v) $5 million to $10 million for general
corporate purposes, which may include the establishment of a manufacturing
operation, either at the Company's shipyards or at another location, that would
be capable of constructing and assembling components of new-build jackups or the
acquisition of one or more businesses that are complementary to the Company's
operations. The Company would expect to fund the remaining portion of its
anticipated capital requirements from cash flow from operations, borrowings
available under its existing revolving credit facility or additional borrowings.
Pending the Company's use of the net proceeds of the Offering, the Company
repaid borrowings under its existing revolving credit facility and invested the
remaining net proceeds from the Offering in short-term, investment-grade,
interest-bearing instruments.
As an additional source of borrowing capacity, the Company has
received a commitment letter from MARAD specifying that, subject to the
completion of documentation and the satisfaction of certain other conditions,
MARAD would provide its guarantee, supported by the full faith and credit of the
United States, for up to $24.8 million of bonds to be issued by the Company.
The proceeds from the sale of any MARAD guaranteed bonds may be used only for
capital expenditures relating to the costs of constructing and equipping the
Company's new shipyard. The terms of the MARAD financing would permit the
Company to issue and sell bonds in increments. Due to the generally favorable
interest rates and payment terms of MARAD financing, the Company anticipates
that it would sell bonds under the MARAD financing arrangement in increments as
capital expenditures are incurred with respect to the new shipyard. Any funds
obtained from the MARAD financing would result in the availability of other
sources of capital, including proceeds from the Offering, cash from operations
and other borrowings, for use to satisfy the Company's other capital
requirements described above. There can be no assurance that the Company will
sell any MARAD-guaranteed bonds.
Management believes that the net proceeds from the Offering, cash
generated by operating activities, and funds available under the Credit Facility
will be sufficient to fund the construction of the new Pascagoula, Mississippi
shipyard, required capital improvements at the Marystown Facility and the
Company's working capital needs at current levels of activity; however,
additional debt financing (such as the MARAD financing) or equity financing may
be required in the future if the Company acquires any additional shipyard
facilities, increases its conversion, retrofit and repair business or obtains
orders to construct new drilling rigs or production units. Although the Company
believes that, under such circumstances, it would be able to obtain additional
financing, there can be no assurance that any additional debt or equity
financing will be available to the Company for these purposes or, if available,
will be available on terms satisfactory to the Company.
In the past the Predecessors made distributions to their stockholders
in order to provide a cash return to them and to fund their federal and state
income tax liability that resulted from the S Corporation status of the
Predecessors. In accordance with this practice, one of the Predecessors made
distributions, prior to the completion of the Offering. Such amount was based on
the estimated federal and state income taxes payable by the stockholders of the
Predecessors on the aggregate undistributed earnings of the Predecessors through
the date of their election to terminate S Corporation status of the
Predecessors. In addition, in March 1997, one of the predecessors made a
distribution to its stockholders of certain nonoperating assets that have a fair
market value of approximately $1.6 million in the aggregate. One of the
Predecessors also distributed to its stockholders (i) cash of approximately $0.7
million received by such Predecessor in June 1997 in settlement of claims for
unpaid amounts related to a project completed prior to 1997 and (ii) marketable
-12-
<PAGE>
securities having a fair market value of approximately $6.4 million. In
connection with the distribution of marketable securities, such stockholders
assumed the related margin account indebtedness of approximately $2.7 million.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings Per Share," which adopts a revised methodology for computing earnings
per share for publicly owned companies. The Company will be required to adopt
the new methodology in the fourth quarter of 1997 and could also be required to
restate previously reported amounts. Early adoption of SFAS No. 128 is not
permitted. The Company does not expect the application of SFAS No. 128 to
materially change the Company's reported earnings per share.
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income," which is
effective for fiscal years beginning after December 15, 1997. SFAS No. 130 will
require the company to (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid in
capital.
In June 1997, the FASB issued Statement of Financial Accounting
Standard No. 131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise
and Related Information," which is effective for periods beginning after
December 15, 1997. SFAS No. 131 will require the Company to report financial
and descriptive information about its operating segments.
FORWARD LOOKING STATEMENTS
This Report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements,
other than statements of historical facts, included in this Form 10-Q, are
forward-looking statements. Such forward-looking statements are subject to
certain risks, uncertainties and assumptions, including (i) risks of reduced
levels of demand for the Company's products and services resulting from reduced
levels of capital expenditures of oil and gas companies relating to offshore
drilling and exploration activity and reduced levels of capital expenditures of
offshore drilling contractors, which levels of capital expenditures may be
affected by prevailing oil and natural gas prices, expectations about future oil
and natural gas prices, the cost of exploring for, producing and delivering oil
and gas, the sale and expiration dates of offshore leases in the United States
and overseas, the discovery rate of new oil and gas reserves in offshore areas,
local and international political and economic conditions, the ability of oil
and gas companies to access or generate capital sufficient to fund capital
expenditures for offshore exploration, development and production activities,
and other factors, (ii) risks related to expansion of operations, either at its
shipyards or one or more other locations, (iii) operating risks relating to
conversion, retrofit and repair of drilling rigs, new construction of drilling
rigs and production units and the design of new drilling rigs, (iv) contract
bidding risks, (v) risks related to dependence on significant customers, (vi)
risks related to the failure to realize the level of backlog estimated by the
Company due to determinations by one or more customers to change or terminate
all or portions of projects included in such estimation of backlog and (vii)
risks related to regulatory and environmental matters, in each case as described
in more detail in the Company's Registration Statement declared effective by the
Securities and Exchange Commission on July 18, 1997. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, no assurance can be given that
such expectations will prove to have been correct.
-13-
<PAGE>
PART II--OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Use of Offering Proceeds
In July 1997, the Company completed an initial public offering of
3,002,521 (6,005,042 after the 2 for 1 split) shares of its common stock and
received net proceeds, after expenses of the offering, of approximately $46.8
million. Through September 30, 1997, the Company had utilized the net proceeds
as follows:
<TABLE>
<CAPTION>
MILLIONS
--------
<S> <C>
Capital expenditures for new shipyard construction $ 5.4
Capital expenditures for equipment and dockspace 2.1
improvements and expansion
Capital expenditures for building and improvements 0.5
Repayment of notes payable 6.5
-----
Total proceeds expended $14.1
</TABLE>
The remaining proceeds of $32.7 million have been used for working
capital purposes or are included in cash and cash equivalents at September 30,
1997.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits
11.1 Computation of Earnings per Share
27 Financial Data Schedule
(b) Reports of Form 8-K
None
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto, duly authorized, in the City of Jackson, State of
Mississippi, on the 13th day of November, 1997.
FRIEDE GOLDMAN INTERNATIONAL INC.
By: /s/ JOHN F. ALFORD
-----------------------------------
John F. Alford
Senior Vice President and Chief Financial Officer
-15-
<PAGE>
EXHIBIT INDEX
PAGE
Exhibit 11.1
Exhibit 27
-16-
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS PER SHARE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
------------- ------------- ------------ -------------
Net Income $ 249,234 $ 5,475,267 $ 3,961,616 $18,505,077
Weighted average number
of common shares
outstanding (A) 18,400,000 23,515,569 18,400,000 20,123,928
----------- ----------- ----------- -----------
Per share amount (B) $ 0.01 $ 0.23 $ 0.22 $ 0.92
=========== =========== =========== ===========
Pro forma net income $ 153,234 $ 5,475,267 $ 2,491,616 $14,525,077
Weighted average number
of common shares
outstanding (A) 18,400,000 23,515,569 18,400,000 20,123,928
----------- ----------- ----------- -----------
Pro forma per share
amount (B) $ 0.01 $ 0.23 $ 0.14 $ 0.72
=========== =========== =========== ===========
(A) For the three months and nine months ended September 30, 1997, the weighted
average shares outstanding includes the dilutive effects of stock options
determined using the treasury stock method.
(B) The difference in the weighted average shares outstanding--primary, and the
weighted average shares outstanding--fully dilutive is immaterial.
Accordingly, primary and fully diluted earnings per share are the same.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 43,317,335 43,317,335
<SECURITIES> 0 0
<RECEIVABLES> 17,569,115 17,569,115
<ALLOWANCES> 0 0
<INVENTORY> 1,950,904 1,950,904
<CURRENT-ASSETS> 66,132,444 66,132,444
<PP&E> 19,657,939 19,657,939
<DEPRECIATION> 3,748,642 3,748,642
<TOTAL-ASSETS> 84,344,805 84,344,805
<CURRENT-LIABILITIES> 23,941,881 23,941,881
<BONDS> 0 0
0 0
0 0
<COMMON> 244,050 244,050
<OTHER-SE> 58,473,398 58,473,398
<TOTAL-LIABILITY-AND-EQUITY> 84,344,805 84,344,805
<SALES> 34,628,577 80,151,773
<TOTAL-REVENUES> 34,628,577 80,151,773
<CGS> 23,217,829 52,641,716
<TOTAL-COSTS> 26,082,378 61,626,320
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 125,648 495,782
<INCOME-PRETAX> 8,945,328 23,225,138
<INCOME-TAX> 3,470,061 4,720,061
<INCOME-CONTINUING> 5,475,267 18,505,077
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,475,267 18,505,077
<EPS-PRIMARY> 0.23 0.92
<EPS-DILUTED> 0.23 0.92<F1>
<FN>
<F1>PROFORMA NET INCOME WAS 5,475,267 (0.23 PER SHARE) AND 14,525,077 (0.72 PER
SHARE) RESPECTIVELY.
</FN>
</TABLE>
